Lesson 5: Sustainable Strategic Management Challenges and Tasks

y y y Understand the basic concepts of strategic management Explain how firms & their environments form a strategic perspective Discuss the tasks and responsibilities of strategic management

Overview of Strategic Management

Sustainability can be systematically incorporated into the strategy and operations of companies through the processes and tasks of strategic management. Corporate strategy is all about companies adapting to their economic, social, political AND natural environments.

1) What is Strategic Management?

Strategy has its genesis in the military. The word strategy comes from the Greek strategos, meaning "the art of the general." In the context of management, strategy is concerned with the overall direction and performance of the firm. The strategist surveys the competitive landscape, determining grand maneuvers and tactics. It is necessary for strategists to have conceptual skills, or a high level of abstraction, to see the entire business system in order to understand its complexities. The word management is derived from maneggiare or menagerie, meaning "to tame the wild horses." The general manager is responsible for coordinating sometimes disparate and conflicting organizational units, resource capabilities and personal agendas. At the tactical level, managers require technical skills to do their jobs. This focus changes as they rise in the organization when it becomes more important to have interpersonal skills because they work with more people and in groups. Example: General Motors Lets try to understand the essence of the strategic management of firms by looking at a specific example. At the end of the 1980s, the American auto industry was reeling from the devastating onslaught of foreign competition, particularly from Japan. By the end of 1990, Japanese automakers controlled 27% of the American auto market. Compared to the previous decade, GMs share of the market had slid from a commanding 46% to a humble 35%. The declining performance forced the company to close down several of its plants. As part of its massive internal reorganization, the company cut costs by $13 billion between 1987 and 1990. The company had to modernize its remaining facilities, requiring an investment of more than $50 billion and offered heavy rebates to reduce inventories. On August 1, 1990 one day before Iraq invaded Kuwait Robert C. Stempel took over as the chairman and chief executive officer of General Motors, the worlds largest industrial company. The Iraqi invasion brought with it skyrocketing oil prices. A 10,000-car order for the Chevrolet Caprice bound for Kuwait was canceled. A fresh wave of fears of economic recession threw the automobile industry into a panic. The international economic and political situation at the end of 1990 was bleak. The Persian Gulf War caused new geopolitical uncertainty in the Middle East. Communist regimes in Eastern Europe were fast breaking down. The former Soviet Union was disintegrating. The U.S. governments budget and trade deficits were over $320 billion and $250 billion, respectively. Oil prices and financial markets fluctuated wildly. A full-scale economic recession boiled down to one thing for GM: nervous, uncertain and reluctant car buyers. Stempel and his top management team faced quintessential strategic problems that most American companies found themselves having to deal with in the 1990s and would continue to face into the next millennium. How should GM react to the environmental changes that were battering its products, markets, technologies and production facilities? How should GM use its scarce financial and human resources to stop its slide? How could GM become more competitive and turn around its financial performance? How could GM ensure long-term profitability? To succeed in a climate of economic uncertainty, GM suddenly realized that it would have to begin making some changes. These included: having to rethink its product designs and product portfolio; cut costs to be competitive with Japanese carmakers; rearrange the structure

of its organization to improve efficiency and product quality; and make cleaner and safer cars to comply with new environmental regulations. However, as it turns out, these strategic challenges were not managed successfully by Mr. Stempel and his top management team. By the end of 1992, Stempel was fired and the top management team was reorganized.

1. Effective Strategic Decisions

GM is not the only company facing such strategic long-term decisions. The foremost challenge facing top management today is how to strategically manage their companies in order to survive and grow in a turbulent environment. However, managing a corporation is a strategically complex task requiring the integration of knowledge from all business areas to run the total enterprise. Managers must understand ways to respond most effectively to the complexities in a changing environment, which involve making tough economic and social choices. Such choices involve complex strategic decisions involving: rational economic analysis, social interactions among managers, political considerations and personal values of individual managers.

2. Organization-Environment Relationships
Strategic management and business policy focuses on managerial issues that affect the organization as a whole issues that have long-term implications and deal with organization-environment relationships. Strategic management and business policy aims to maximize the effectiveness of the entire organization while striving to improve efficiency. This orientation toward effectiveness, in addition to efficiency, is strategic managements hallmark. Efficiency refers to the ratio of inputs over outputs. An efficiency orientation attempts to maximize outputs for any given set of inputs. It involves producing goods and services in the most technologically and economically competent manner with a focus on a minimum waste of resources. Effectiveness is the ratio of achieved outputs over needed outputs (goals), or referred to as the percentage of goal attainment. The output needs are determined by environmental demands. An effectiveness orientation requires developing organizational objectives that are consistent with the environment, as well as managing the organizations resources to be responsive to environmental changes while meeting specific objectives. One idea that allows executives to manage for both efficiency and effectiveness is the concept of strategy. This reading focuses on several central questions of strategic management: What is strategy? What are the tasks of strategic management? Whose responsibility is strategic management? At what levels must strategies be formulated and implemented? We will study why firms need strategies as they evolve and grow, as well as examine the benefits of strategic management. The emphasis on effectiveness does not necessarily have to come at the cost of sacrificing efficiency. Although efficiency is highly desirable and even necessary for success, by itself it is not sufficient to ensure long-term success. In fact, as will be seen, companies such as Pan American Airlines (Pan Am), Facit and EPI Products USA failed to survive due to their lack of focus on effectiveness, despite being large and efficient. Examples: 1) Pan Am was the first largest U.S.-based international airline. The company has been acknowledged for having virtually created the airline industry, as well as defining efficiency standards in the industry. Prospering in the highly-regulated airline environment from its beginnings to the early 1970s, Pan Am exploited its economies of scale, providing for excellent route structure and efficient airplane fleet. Despite these successes, after operating for nearly 50 years, the company went bankrupt. How and why could a company so well-positioned in the airline industry eventually come to face failure? The deregulation of the airline industry in 1978 brought an onslaught of competition, resulting in radical changes in the environment. Deregulation altered the industrys competitive structure, leading to a loss of control over routes and prices. The industry organized itself along a hub-and-spoke system, with certain large cities acting as regional hubs. Passengers came into these hubs from smaller regional airports (spokes) and made connections to other hubs. Major trunk carriers provided connections between these hubs, and

smaller regional carriers connected small airports to hubs. Major airlines started tying up their flight schedules with small, regional, feeder airlines to create convenient connecting flights for travelers. Despite the changing landscape, Pan Am continued to conduct business as usual and did not change its objectives or operations to fit industry shifts. By the mid-1980s, it started losing business to domestically well-connected carriers such as American Airlines and United Airlines. Pan Am found itself at a disadvantage as these competitors expanded internationally. It did not have a good network of domestic carriers that could feed its international flights. Further exacerbating the problem of Pan Aims complacency were other environmental changes taking place. These included: a worldwide economic recession, aggressive competition from foreign airlines, rising fuel prices and labor disputes. All of these changing factors began to quickly erode the companys profitability. By 1985, it was losing money and started shedding assets to shore up operations. It sold some of its best international routes (New York to London) and its domestic shuttle operations. These desperate measures were insufficient to turn the company around. Finally, in January 1991, Pan Am filed for bankruptcy. Pan Am is an example where a company does not respond appropriately to environmental changes by making the necessary internal changes. Due to the companys lack of an effectiveness orientation, the once well-known company ultimately failed. Example 2) Facit The story of Facit is even more dramatic. Facit was once the largest producer of mechanical calculators in the world. Its efficient production and marketing made it highly profitable. In the 1960s, the electronics revolution swept through the consumer goods industry with a variety of consumer electronic goods, including electronic calculators. Facit saw electronic calculators as a fad that posed a temporary threat to its operations, so the company continued producing mechanical calculators but at higher levels of efficiency. It invested heavily to further improve production efficiency. It built bigger production plants to exploit economies of scale. It streamlined its distribution system to reduce costs to bare minimums. One of the stronger competitors in the calculator market that Facit faced during this period was HewlettPackard and its electronic calculator. Within a few years, Hewlett-Packard flooded the market with lowpriced machines that outperformed mechanical calculators. Not too long after, mechanical calculators were replaced with electronic calculators, and Facit went bankrupt. Facit exemplifies a company that was very successful in achieving the objective of being the premier producer of mechanical calculators in an efficient manner. However, what eventually brought the company to its demise was the failure to align its objectives with environmental demands. By misidentifying the changing nature of the calculator market, the company pursued the goal of production efficiency without effectively dealing with competition. Example: EPI Products USA The summer of 1990 was the best and the worst summer for EPI Products USA. With sales of more than $200 million, the three-year-old company was an example of how a firm could attain quick success. It had innovative product designs, creative marketing, and a dynamic management team. Its best-selling product was Epilady, a hair removal appliance for women. This device used rotating coils to yank body hair up from the roots leaving skin soft and smooth. The device targeted the upscale market, priced between $60 and $89 and sold through Bloomingdales and other elegant stores. There was no doubt, at that time, that Epilady had revived a once sleepy hair-removal industry. The Krok sisters (Loren, Arlene and Sharon), cofounders of the firm, were integral at making this product a big success, leading to their instant marketing celebrity status. They appeared in photo spreads with accompanying stories about their phenomenal success. The quick rise of the companys success led to the rapid expansion into other products. These new product offerings included mini saunas, foot bath, skateboards, expensive skin lotions and $12 tubes of toothpaste. The company even produced a Broadway musical (Meet Me in St. Louis) which experienced a loss of $7 million. The rapid expansion into new product lines with little consideration of consumer and competitive environments resulted in a cool reception from the market.

In a short time, EPI Products USA squandered its success from its hair removal product on several other losing ventures. On August 23, 1990, the company filed for bankruptcy. It had accumulated liabilities of $77 million on assets of $73 million. Lenders sued the company and sought to collect $24 million in loans while cutting off credit. Its projected cash flow for the crucial month of September was a negative $2.1 million. EPI Products USA demonstrates how a company once able to toot enormous success can quickly lose its market position through loss of focus, unclear objectives and little examination of the needs of its consumers and competitive environments.

3. What is Strategic Planning?

The failure of firms to adapt effectively to the changing global environment has led to the decline of entire industries in the U.S. During the 1970s and 1980s, the U.S. lost its status as a world leader in manufacturing steel, automobiles and consumer electronics goods to Japanese firms. These Japanese firms have been more effective in identifying worldwide demand for such goods through focusing on global strategic management. These examples illustrate the importance of managing firms for the long term and responding to a changing environment. To do so, companies should focus on how to be both effective and efficient. To succeed in the long term, a company must have well-formulated and consistently implemented strategic plans. Plans should be based on correct assessments of environmental demands and an appropriate set of objectives. They should help managers monitor environmental trends and correctly align the firms resources with these trends. Strategic plans create organizations that can achieve their objectives. Thus the goal of good strategic management is: formulating and implementing corporate and business strategies. Such strategies can propel the company to long-term growth and prosperity. In common sense terms, a strategy is simply a statement of ends (goals) and the means for achieving these ends. In corporations, strategies consist of a set of goals, strategic programs for achieving these goals, and resource allocations for implementing strategic programs. Firms choose their goals to reflect the demands of their many stakeholders. Through strategies, they align their internal resources with environmental demands to ensure long-term effectiveness. Although some authors separate goal formulation from strategy formulation as analytically separate activities, in practice, there is a close connection between the two. Goals determine strategies, and to some extent strategic performance shapes and even limits the goals that a company can reasonably pursue. In this lesson we include both goal formation and strategy formulation as integral elements of strategic management. Strategy, then, can be said to describe the firm and its approach to doing business. Strategies specify what products the firms will produce, what markets to operate in, and what types of competitive advantage the firm will use. Strategy also describes how resources will be allocated and the way in which corporate objectives will be achieved. The term strategic management then suggests an ongoing iterative process that involves all managers rather than a final plan, program, or budget that top managers delegate to others.

4. Understanding Corporations and Their Environments from a Strategic Perspective

Most modern business firms, either private or public corporations (particularly the large ones), operate in free-market economies dealing with multiple products, multiple markets and often multiple countries. There are many different ways of accomplishing strategic management activities. Each presumes a certain perspective on organizations, their environments and strategies. This lesson views business organizations as systems of production and distribution that serve multiple purposes for their stakeholders. They provide products and services for consumers, profits for investors, jobs for employees, taxes for governments and economic stability for communities. They contribute to the welfare of society by being economically productive and socially responsible. Their goals represent a synthesis of goals and demands placed on them by these stakeholders. Although organizations primarily serve productive purposes, the focus on economic productivity at the expense of social responsibility can be a source of harm. Some of the potential harms caused by firms

include: Harm to its consumers through defective products Harm to its workers by using unsafe or unhealthy work practices Harm to the public-at-large by imposing technological risks and causing industrial accidents Harm to the natural environment through environmental pollution and degrading natural resources Mitigating and reducing the risk of harm is therefore an important part of strategic management. Effective management is more than a focus on just organizational productivity and includes consideration of business actions as they affect the welfare of society. Administratively, corporations may be seen as consisting of multiple business units. Each business unit operates within specific industries and serves well-defined markets of products. Oftentimes, these business units have independent production and distribution systems, each holding its own profit responsibilities. For administrative convenience, several business units may be combined into a division or a group. A central office called the corporate headquarters usually coordinates activities of business units or divisions. The organizations environment consists of a continually-changing competitive marketplace operating within a global economy. Many economic, social, cultural, political and technological factors influence the environment. With rapid growth brought on by globalization, the consideration given to the natural environment or the planet Earths ecology is critical. This broad conception of the organization and the environment in which it operates, calls for analyzing environmental influences on firms and vice versa. In simplest terms, strategies align or match the organization with its environment. This alignment requires the accurate assessment and identification of environmental forces and potential gaps between the firm and these forces. Sometimes this is done through rational economic analysis. At other times it requires subjective, value-laden, personal choices of managers. The purpose of strategic management is not only maximizing the productive outputs of firms but also minimizing their harmful possibilities. Strategies must be viewed as much more than a means for improving a firms competitive position; they are a means for making the firm more useful and productive to society. The strategic vision of any firm should include ways of improving financial performance while making it more socially legitimate. The process of strategy implementation is both economically and socio-politically rational. Economically, it attempts to optimize and make efficient use of resources. However, optimal allocations are not always politically feasible. Strategic changes invariably involve reshuffling the interests of internal and external stakeholders. Social and political processes intervene in formulating and implementing strategies to maintain trade-offs and balances between competing interests. With this perspective, we now turn to the tasks of strategic management.

5. Strategic Management Tasks and Responsibilities

Described below are seven tasks that constitute strategic management in organizations. Together these tasks allow firms to analyze their environment and strategically align their resources for long-term success. In addition to these generic tasks of strategy making, managers must address a number of emergent strategic issues involving global strategic management, strategic mergers and acquisitions and strategic crisis management. Environmental Analysis involves examining the interdependence between organizations and their environments. More specifically, this involves looking into how forces outside the organization affect its performance and how organizational activities affect its environment. This assessment identifies opportunities and threats facing the organization. The environment consists of economic, technological, social, political, cultural and physical (ecological) influences. Each segment of the environment must be studied for its history, current trends and future prospects. Goal Formulation refers to setting organizational objectives and direction. Every organization must set clear and consistent objectives for the total organization and its parts. These objectives should reflect the wants and needs of organizational stakeholders and their expectations about performance. Because organizations satisfy multiple stakeholders, demands on them are very complex and sometimes conflicting. Goal formulation, therefore, must balance the competing goals of stakeholders and set priorities on attaining them. Internal Resource Analysis identifies the organizations key strengths and weaknesses by systematically evaluating the resources available to each individual division or business unit. Conducting this analysis identifies the capabilities in finance, production, marketing, research and development (R&D), administration and management. Strategy Formulation refers to developing strategies and strategic plans and programs. Strategy formulation involves matching environmental opportunities with organizational strengths and weaknesses. This must be done both at the corporate level and at the business unit level. The resulting strategic plans state the scope and objectives of the organization. They describe strategic programs for achieving objectives. Strategic programs are a set of focused action programs that make up the strategy. Strategy Implementation is the task of putting a strategy into action and making it work for the firm. This requires allocating appropriate human and financial resources. To successfully implement strategies, managers may need to change organizational structures, systems and staff. This may require the development of new skills, establishing strategic leadership and creating a new culture. They may need to design a performance evaluation and compensation system that rewards behaviors that are consistent with the strategy. Strategy Evaluation means that every strategy should be evaluated for feasibility and soundness. The evaluation should ensure that the strategy is consistent with corporate objectives, environmental demands and internal resources. By identifying and eliminating internal conflicts and contradictions between different elements of strategic plans, the evaluation requires the commitment of organizational resources. Strategy Monitoring and Control is an extension of strategy evaluation. During strategy implementation, managers must continually evaluate the level of achievement of objectives. They must monitor performance and modify strategies if they deviate from objectives or plans. Monitoring and control systems must provide managers with timely and actionable information on the strategy and organizational performance.

6. Strategy Making
The strategic management process is one that is neither discrete nor separate and boundaries are fuzzy and overlapping. Strategy making should begin with setting direction and formulating goals. This involves assessing current goals and determining future goals. After determining goals, two types of analyses need to be conducted simultaneously: an analysis of environmental forces to identify key opportunities and threats facing the organization, and an analysis of internal resources to identify organizational strengths and weaknesses. By matching internal strengths with environmental opportunities, strategic alternatives can be generated. These alternatives should be assessed in light of the personal values of top management and the corporations sense of social responsibility. The outcomes of this strategic decision-making process are statements of strategies and strategic plans. Strategies should be subjected to an independent evaluation of feasibility and soundness. Evaluation allows for modifying strategies before committing vast resources to implement them. Implementation involves changes in organizational structures, systems and resources. As the new strategy begins to influence performance, there should be regular monitoring and feedback with periodic modifications. This process returns to goal setting in the next cycle of strategic management. Each organization follows its own system for performing strategic management tasks. In some companies there is a separate strategic planning department in charge of facilitating the strategy process. The department has professional planners and analysts who support line managers to formulate and implement strategic plans. The planning occurs in specific steps and through analytical procedures. In other companies, strategic tasks may be done informally and with little consultation. These decisions may be made by a group of special assistants to the chief executive officer (CEO). Historically, the CEO, president, or general manager of an organization has had complete responsibility for strategic management. He or she was the key decision maker, leader and coordinator of the organization. Legendary CEOs, such as Harold Geneen of International Telephone and Telegraph (ITT), Thomas Watson of International Business Machines (IBM) and Ted Turner of Turner Broadcasting System (TBS) are famous for personally directing strategic management in their respective firms. In most large firms today, however, strategic problems are so complex that it is very difficult for a single individual to solve them alone. Consequently, responsibilities for strategic management tasks have become dispersed throughout the organization. Although the CEO or president shares strategic responsibilities with a top management team, an executive committee or the office of the chairman leads this function. Major companies such as General Electric, Exxon and Shell Oil have created special structures for strategic decision making. In addition, there are several specialized departments that help in conducting strategic analyses. These include a strategic planning department, environmental scanning department, new business planning department, or mergers and acquisitions department. Staff planners serve the role of educators and process facilitators in large corporations. Thus, the greater complexities in business environments and sheer size of some corporations have resulted in the expansion of the traditional strategic role of the general manager beyond a single person. These factors also require firms to make strategies at several different levels.

7. Different Levels of Strategy Making in the Firm

Strategies must be developed at several levels within the organization to ensure that they cover all organizational activities. These strategies are described below and include the corporate level, business unit level, functional area level and the social and ecological levels. Corporate Level At the corporate level, the firm faces several strategic questions: What businesses should we compete in, given our strengths and weakness? Which new product markets should we enter? Which should we exit? This is the "domain choice" question that describes the firms scope of operations. For example, the corporate strategy of Textron is to be a multiproduct firm that manufactures industrial and consumer goods. The firm seeks rapid growth through acquiring ongoing businesses that are sound at an internallydetermined rate of return on investment. These businesses are initially acquired as financial assets that require capital and management expertise to grow, but when they fail to operate at an internally acceptable rate of return and growth the firm divests them. In contrast, GM sees itself as a single-product firm that

produces automobiles. Its main product lines are different types of cars, trucks, buses and accessories. New products and businesses are created in this industry through internal research, acquisitions and joint ventures. In sum, corporate level strategies deal with the following options: Vertical Integration Diversification Strategic Alliances Acquisitions New Ventures Business Portfolio Restructuring Business Unit Level At the business unit level, the strategic question is: How should we compete in the product markets in which we operate? Business unit strategy seeks to develop competitive advantage over other firms in the industry. Product design, choice of the marketing mix, and establishing competitive advantage are key strategic factors to consider at this level. For example, GM pursues a competitive strategy of differentiating its products through innovative product designs, strong advertising and extensive dealer support. For example, the company was the first American company to make a commercial electric car. In contrast to this strategy of product differentiation is the strategy of operating at the lowest delivered cost. This is the strategy Honda adopted to enter the United States motorcycle industry. As the largest volume manufacturer, Honda has a sustained competitive advantage in low-cost production through automated mass production techniques. After having succeeded on the West Coast in the U.S. with its low-priced motorcycles, Honda expanded to the East Coast. Within a few years, the company captured the largest market share in the industry. In sum, business unit level strategies deal with the following options: Cost Leadership Differentiation Market Niche Focus Functional Area The third level of strategy is the functional area within business units. Each business unit has several functional areas such as marketing, production, finance, human resources, planning and distribution. At this level, strategies are often called functional policies. Companies have policies that standardize and simplify tasks within each function to be most efficient. These policies should be consistent with each other. Jointly, these policies form the basic operating system of the organization. Strategic management, however, is not a sum of individual functional strategies. For example, companies have standard policies for accounting, auditing, personnel hiring and retrenchment, sales order processing, production scheduling and inventory management. Functional area strategies deal with the following policies and tactical decisions consistent with the organizations overall strategy: Manufacturing Marketing Materials Management Research and Development Human Resources In addition to these functional levels of strategy making are social and ecological strategies. Increasingly, companies must ensure their legitimacy in communities and society through acknowledging these types of strategies. How companies fulfill their responsible roles in society can vary from those who make internal procedural changes to those who institutionalize social responsibility as a regular organizational function and develop social responsibility strategies. For example, companies such as Procter & Gamble have strong social strategies involving corporate philanthropy, citizenship activities, support of public events and environmental protection programs. These strategies aim at making the company socially desirable and publicly accepted. They earn the goodwill of the public, customers, government and other stakeholders.

Summary
Modern corporations operate in turbulent environments. To survive and grow, they must respond strategically to environmental changes. Through strategic management, organizations are effective in meeting the changing environmental demands and organizational objectives. Strategic management establishes organizational missions, objectives and goals. Goals are established by balancing the competing demands of organizational stakeholders. Corporate and business strategies achieve these goals. Strategic management allocates resources to implement strategies. Strategy formulation requires analyzing environmental forces by identifying key opportunities and threats facing the organization. Simultaneously, the firm analyzes internal resources to understand the strengths and weaknesses of the organization. Strategies are created by matching external opportunities and threats with internal strengths and weaknesses. Strategies are divided into several strategic programs to ease implementation. Strategies should be evaluated for their feasibility, soundness and consistency with internal and environmental conditions. Strategy implementation requires allocating appropriate resources, creating the right organizational structure, establishing supporting administrative systems, and developing requisite managerial skills. Monitoring strategic performance and controlling strategy are also important tasks of strategic management. Strategic management responsibilities are dispersed throughout the organization. The CEO and top management team provide leadership and overall guidance. Line managers make substantive plans and implement strategies. The planning staff provides analytical support to the strategic planning process. Strategies need to be developed at three levels. The first of these levels are corporate strategies, which determine the companys domain of operation. They describe the products, markets and businesses that the company wants to operate. Next are business strategies, which provide individual business units with a competitive advantage over other firms in the industry. Functional area strategies make the routine operations of business functions efficient. In addition to these three levels are social and ecological strategies, which aim at fulfilling the demands of the community and of society.

1. What do you think the new competitive landscape is, and how are companies coping with these changes? 2. What is Total Quality Environmental Management? What are the benefits of this approach? 3. What industries are most likely to be impacted by climate change issues? For which industries is climate change an opportunity and for which industries is it a threat? 4. Examine how one of the following several large companies is making strategic decisions: Bloomingdales | Exxon | GE | GM | Honda | HP | IBM | P&G | Shell Oil | Textron | Turner Broadcasting System. What kinds of organization structures, systems and processes have they created?